Payments to farmers may exceed farm bill's expectations

Falling crop prices are raising cost projections for new farm programs even before producers have signed up this spring.

The Congressional Budget Office weighed in this week with a revised baseline that shows annual payments to farmers could average $4.8 billion over the next decade — a nearly 50 percent increase over what CBO had predicted less than a year ago after passage of the 2014 farm bill.

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Taxpayers will get some relief, because the same market changes that are driving up the cost of the commodity title of the farm bill will help to lessen the cost of the heavily subsidized crop insurance program. CBO’s new baseline shows a modest $200 million drop from its past projections for average yearly crop insurance costs, and some economists argue that this number understates the potential savings.

As a rule, lower prices reduce the value of the crop to be insured and therefore the total premium needed to cover the liability. In the past six years, the projected base price for corn, which is set for revenue insurance each winter in advance of spring plantings, has proved a surprisingly good indicator of changes in total premiums.

But CBO’s approach appears to be more rigid, as seen in its estimates for 2016. On one hand, it has lowered its prior projections for corn, wheat and soybean prices by 13 percent to 16 percent. But it then shows a higher premium of $8.7 billion for the total program — even as it also assumes that 9 million fewer acres will be covered.

Until farmers have enrolled and the landscape is better defined, all those estimates are more a red flag than a final word. But the numbers are important in that they show the political risk undertaken by the new farm bill at a time of wholesale change in market prices.

For most of two decades, the federal government distributed farm subsidies in the form of direct cash payments, which cost about $4.9 billion annually and went out the door regardless of whether a farmer had losses — or even planted a crop.

The reforms Congress enacted last year were an attempt to meet producers’ real needs, but the cost estimates that the House and Senate Agriculture committees used at the time failed to keep up with the pace of price changes in commodity markets.

The scale of these shifts is best illustrated by comparing prices from 2009 to 2013 with CBO’s new projections for the five-year life of the new farm bill: 2014 to 2018. Between the two periods, economists estimate that the average price of corn will drop by 44 percent; soybeans are projected to drop 35 percent and wheat 26 percent.

As a result, the two commodity support programs enacted to substitute for direct payments have jumped in cost.

The new “price-loss coverage” plan, which had seemed inexpensive when CBO was still assuming $4-per-bushel corn prices, will cost 67 percent more now that corn is being pegged in the $3.50-per-bushel range.

In the case of the second big program, Agricultural Risk Coverage, the jump is less dramatic — about 26 percent. But that’s in part because CBO is still assuming that only about a third of farmers will enroll in this more complicated alternative.

Indeed, the immediate payout under ARC is higher than what PLC offers in today’s market, especially for corn growers. If more producers sign up for ARC, the cost estimates will certainly change and could potentially get larger in the first years.

As it stands now, CBO is projecting that the combined annual costs of ARC and PLC will average about $4.4 billion compared with CBO’s projection of $2.94 billion for the same two programs last April.

That’s a nearly $1.5 billion increase in itself and largely explains the spike in total payments. Other, smaller subsidy programs, like marketing loans, round out the total at $4.8 billion, but ARC and PLC account for more than 90 percent of the annual payments projected by CBO.

Farm bill advocates would answer that the $4.4 billion is still cheaper than the old system of direct payments. But lawmakers are increasingly concerned about a political backlash if large subsidies to big producers again become a political issue.

For the next few years, at least, it is easy to envision corn growers under ARC getting double or triple what they received under the direct payment program. Peanut growers got $65 million in direct payments in 2014. By 2017, CBO projects that their payments could reach $209 million under PLC.

Adding to this image problem is the fact that King Cotton could be back in the headlines given the increased costs projected for marketing loan benefits.

The extension of this support program — which is much smaller than ARC or PLC — received far less attention in the farm bill debate because its costs are typically low at a time of higher prices. But the new CBO baseline projects that the annual cost could average about $260 million — more than twice what was estimated last April. And cotton alone reaps more than half of the total benefits.

Predicting crop insurance costs is always complicated because of variables like crop yields and coverage levels. And the new farm bill ushered in several major new products, requiring more time before their impact — and full costs — can be calculated.

But crop prices are the biggest driving force in setting premiums, and one of the intriguing aspects of the new farm bill is it essentially invests in two sets of price-driven policies, which can help counterbalance one another.

In the past, direct payments went out regardless of crop prices even as the boom in corn drove up crop insurance costs. Now ARC and PLC are essentially countercyclical programs that go up and down with prices — and in the opposite direction from crop insurance premiums.

Congress is still far away from finding the sweet spot that could promise more stability for the taxpayer. But the next few years will be a real test of how much crop insurance costs will come down as a market response to the same price collapse that is driving up commodity programs.

To examine this more closely, POLITICO reviewed numbers over the past six years for corn, wheat and soybeans. Together, these constitute about 70 percent of the total premiums charged each year for crop insurance, and when prices fell across the board for these crops between 2013 and 2014, so did premiums for each.

In many respects, corn is so powerful that it serves as almost a leading indicator on its own for the whole crop insurance program.

For example, from 2008 to 2010, the base price for corn fell from $5.40 to $3.99 per bushel, a 26 percent drop. Total premiums for the crop insurance program fell 23 percent in the same period.

In 2011, the base price for corn jumped back up to $6.01 bushel, a 51 percent increase. Premiums for the entire program followed with a 58 percent increase.

The same pattern has pretty much continued as prices have since fallen. From 2011 to 2014, the base price for corn dropped by 23 percent to $4.62 per bushel. In the same window, the total premium for crop insurance fell 17 percent to $10 billion.

These changes are important to the taxpayer on several levels. Lower premiums mean lower subsidies. And in CBO’s case, it affects how much money it assigns to underwriting gains for the private crop insurance companies that sell and manage the policies.

CBO declined to comment for the record, but it appears to assume that farmers assign a fixed amount of their budgets to risk management: If costs go down, they simply buy higher levels of coverage or more expensive policies. This is a more static interpretation than the record shows.

“History shows there is a close correlation between crop prices, as represented by corn, and the total crop insurance premium and premium subsidies,” said Keith Collins, a former chief economist for the Agriculture Department and a consultant now for the crop insurance industry. “So when prices drop, as over the past two years, premiums and subsidy costs fall.”